February 8, 2005

I’m an economist, but I know exactly how a geographer would feel if he saw a news story from a major wire service explaining how the earth is flat, hardly even bothering to mention that some people think it’s round. This is not unusual; it happens every time there’s a major natural disaster.

COLOMBO (AFP) – The Indian Ocean tsunamis killed 31,000 people in Sri Lanka and caused unprecedented damage, but were also a blessing to its economy which had been heading for a major catastrophe, according to analysts.
…
Analysts said the avalanche of assistance from global lenders and the post-tsunami reconstruction across the devastated regions will kick-start economic growth now expected to cross five percent next year.

There will be a dip in the gross domestic product (GDP) in 2005 as an immediate effect of the tsunami, but from next year the reconstruction effort will emerge as a growth engine, the analysts said.

“This is the opportunity for growth for Sri Lanka,” said Alastair Corera, vice president at global rating agency, Fitch.

No, no, no. Wrong, wrong, wrong. There is absolutely no way the tsunami can be a “a blessing to its economy.” If the economy were previously “heading for a major catastrophe,” then it hit an even more-major catastrophe.

There are two explanations for this, the calm explanation and the exasperated explanation. Both are correct.

First, the calm explanation: To say “the country’s economy is good” (or bad) is simply shorthand for saying the people in that country are living well (or not so well). Economists normally measure this by gross domestic product (GDP) per capita â€“ that is, the total output of all goods and services produced per year, divided by the total population of that country. This is basically a measure of the average income per person in a given country. However, part of how well you live is sometimes determined not by how much income you have this year, but by what durable assets you have — which you may have received many years ago, but from which you still derive benefit today. For example, someone in Sri Lanka may earn $3,700 per year (the estimated per capital GDP for that country in 2003; this the average for all people including children, so the average worker certainly earns much more). If you earn $3,700 per year (per person) you can live at a certain level. You can live at a higher level if you earn $3,700 per year and also have a house your father built on the beach a few decades ago, and a fishing boat you bought or built a few years ago. Your actual standard of living is what you produce this year, plus what you produced in the past that is still useful.

Now, the tsunami comes and knocks down your house. You live in a tent, if that, but now, with “economic growth now expected to cross five percent next year” you can get a great job at a five percent raise. Gosh, that means you can earn $3,885 next year! Sure, you lost your house, your fishing boat, your bicycle, and all your other assets, but hey, you’ll get an extra $185 a year from now on! Isn’t the tsunami wonderful for economic growth?

In fact — and here comes the exasperated explanation — if a tsunami that destroys three-fourths of the Sri Lankan coastline is so great for the economy, then a tsunami that destroys the entire coastline, plus half the interior of the country should be even better, right? And if there’s no tsunami this year, it’s no big deal — can’t they create economic growth just by having the Sri Lankan air force bomb the coast every few years? They’ll be rich! Gosh why didn’t anyone think of that before? Solve world poverty by bombing all the poor countries into prosperity! Brilliant!

No, no, no. Wrong, wrong, wrong.

Tsunamis are bad for the Sri Lankan economy because they destroy the wealth of people in Sri Lanka. The fact that they get “economic growth” from rebuilding is bad, not good, because it represents Sri Lankans working really hard just to get back to where they were before. It is not really “economic growth” in the normal sense; it’s just a measure of the fact that they have to “catch up” to where they would have been without the tsunami. If you think I’m wrong, then burn your house down and see if that makes you richer.

By the way, there another critical error in this “disasters are good for the economy” theory. This error is so blatant, and so common, I nearly dforgot to mention it. And that is, they completely ignore the fact that thousands of people died from the tsumani. If dying doesn’t make you worse off economically, I don’t know what does. And this is not to mention the fact that if you survived but lost family members, you are also worse off for not having them, in addition to your material losses.

I know it’s hard to put an economic value on somebody’s life, but to ignore the human cost implicitly assumes that human life has zero value. Got that? To believe that the tsunami is good for the economy, you not only have to believe that the small increase in future income is worth more than the huge loss of assets, but you also have to believe that human life is worthless.

It’s really scary how many people believe that. If you’re paying attention, you’ll see an article like this after practically every disaster; not just the tsunami, but hurricanes, earthquakes, terrorist attacks, and so on. As an economist, I find this level of economic ignorance appalling — and scary, knowing that people who think this way are sometimes making big economic decisions.

UPDATE (2/9/05 2:00pm):

In the comments, Medical Madhouse points out that they also forgot to include medical costs to treat the injured-but-not-killed victims. I’m sure they did. However, since they include the cost of rebuilding buildings as a good thing (“economic growth”), they could just as easily include the cost of rebuiling people, i.e., medical care, as a part of economic growth. This would be just as (in)correct.

Perhaps it’s obvious that medical costs are a loss, since they just take a person back (at best) to the situation they were in before the disaster. In that case though, shouldn’t it be equally obvious that rebuilding costs are also a loss, for exactly the same reason?

The Broken Window Fallacy is the (incorrect) idea that if some delinquent throws a brick through a window of a shop, this is good for the economy, since the owner of the shop will have to pay to fix it, and the glazier who fixes the window will use that money to buy other things, from people who will in turn use that money to buy still other things, and so on. Why is this wrong? Because if they window had not been broken, the shop owner would still have spent that money, just on other things. And, whoever he bought from would have used that money to buy other things, etc. So, with the broken window, the shop owner spends money just to get back to where he started — he started with an intact window, and has one again. If it had never been broken, he’d have an intact window plus whatever else he could buy with the money he doesn’t have to use to replace the window. The only “winner” when the window breaks is the guy who fixes the window — and he “wins” at the direct expense of somebody else. Society as a whole is still worse off by the cost of one window.

It’s the same thing with tsunamis, hurricanes, earthquakes, and blackouts — it’s just with those, there are a lot more windows broken.

Very well written article. I think that what happens is that, like you said, they strictly look at the numbers and forget to include the host of other factors that were influenced by the Tsunami.
As a medical practitioner and knowing just a little about the medical costs that would be incurrred as a result of this catastrophy I can safely say that those costs alone would shake the foundation of any economy. Much less that of Sri Lanka.

The broken window theory strikes again
Different River throws his stones at a re-appearance of the “broken window theory”….
In this universe, the village is richer by at least the $100 it costs to replace a broken window.

Very Keynsian. The reason a tsunami would be a net good for the economy is that it causes money to circulate faster. Never mind that ultimately someone has to do something useful with the stuff.

Why not set everyone up with a bank account, and have money transferred among all the accounts on a continuous basis, and skip the delays that result from stopping to build stuff. In microseconds, the folks in Sri Lanka will be wealthy enough to buy Microsoft with pocket change.

Broken Windows Redux
Every time there’s a big disaster, some idiot trots out our old friend The Broken Window Fallacy. The Broken Window Fallacy is the distressingly common belief that some destructive act, such as, say, breaking windows, is good for the economy, because …